Think winning your March Madness pool can only teach you something about basketball? Think again.
With the NCAA tournament now here, many are spending hours prepping for their bracket pools with coworkers, friends, and family. Some people will carefully and diligently pour through each team's record and analyze all 63 matchups. Others will pick their favorite team because, well, it's their favorite team. And some prefer fun things like picking which mascot would win in a fight, which colors they like more or even throwing darts or flipping coins.
While brackets are a fun American pastime enjoyed by all, the lessons from filling out the bracket can teach us all a few things about personal finance and investing.
1. Do your homework
When asked about investing, Warren Buffett, the head of Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) -- which is also insuring the opportunity for someone to win $1 billion to with perfect NCAA bracket -- said:
"If you like spending 6-8 hours per week working on investments, do it. If you don't, then dollar-cost average into index funds. This accomplishes diversification across assets and time, two very important things."
Buffett -- one of the most successful investors ever -- is suggesting there are really only two strategies to investing, spending hours of diligent research to find great companies, or instead simply trusting the market through an index fund. Both of these strategies typically have great historical returns.
The same is true of a bracket, as the highest chance of success would be met through diligent and careful analysis of each and every matchup.
Does that mean if you're not willing to do that you shouldn't enter a bracket pool? Certainly not, as an entry fee can be viewed as the cost of weeks' worth of entertainment. However, it should be a reminder to everyone that blindly picking teams isn't a great bracket strategy, and it is indeed a terrible one when it comes to investments.
2. Don't only pick the favorites
At the same time, in both the NCAA Bracket and investing, it's important to see picking only the favorites is often a losing strategy. That's why there are constantly underdogs who surprise nearly everyone, the beloved and almost assured 5-12 upset, and the "Cinderella," team which captures the heart of Americans everywhere.
In fact, Nate Silver at FiveThirtyEight -- who has been notoriously successful at picking presidential elections -- has projected a four seed, the Louisville Cardinals, is the favorite to win the NCAA tournament, and thereby repeat as NCAA Champions. Silver's model projects Louisville is three times more likely to win the tournament compared to one-seed Wichita State.
It turns out stocks that are often beloved by analysts -- the ones with the most "buy" ratings -- also don't make the best investments.Those could be viewed as the one seeds in investing, and as my colleague John Reeves points out, "Countless studies have shown that the forecasts and stock recommendations of sell-side analysts are of questionable value to investors. As it turns out, Wall Street sell-side analysts aren't primarily interested in making accurate stock picks and earnings forecasts."
While the one seeds may capture the hearts of many, having a bracket where only the favorites advance -- either by seeding or expert selection -- may be appealing, but in all likelihood, it won't be the one that wins your NCAA pool. In the same way, it's also critical to approach investing in companies that everyone else loves with an ample amount of caution.
3. Keep track of your picks and learn from them
Online brackets make things easy, but there is also value in printing it off and highlighting correct selections and using ink to cross off the picks that were incorrect. It's important to learn from both the successes and mistakes in both financial decisions and tournament picking, as "those who don't know history are doomed to repeat it."
Any time failure occurs, whether it be something small like a tournament bracket selection, or something truly significant like an investment or personal finance decision, diving back into the mistake can often be painful, but in the long run will ultimately pay dividends as it's used as a learning experience.
As Rick Warren notes, "we are products of our past, but we don't have to be prisoners of it," and ultimately we all have learning ahead of us.